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Corel – the serial Linux deal-maker

Is the Corel alliance programme smart, or just plain confused?

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Corel's aggressive Linux alliance-building programme - six deals in five weeks - shows no sign of slowing down, with the Tuesday announcement of Corel having taken up to a 30 per cent stake in Ottawa-based OE/ONE.com for an undisclosed sum. No wonder Corel thinks it has only done five deals, according to its Q4 financial statement, although that was issued only hours after the OE/ONE deal. The avowed objective of this latest alliance is to deliver a lean Linux appliance platform. Now, who should be running this start-up but Eid Eid, who a few years ago was head of Corel development. One could reasonably question the company's direction here, given that it was developing the NetWinder, its own Linux-based appliance platform, until it sold it to Rebel.com. But as that deal resulted in Corel getting a 25 per cent stake in Rebel.com, the outfit now qualifies as one of those alliance partners. And then there's GraphOn. Corel took a 20 per cent stake in the company last year, and is integrating GraphOn Bridges, which allows Windows apps to be run on remote servers, into Corel Linux. But in December 1998 Corel sold its (i.e., Corel's) jBridge software to GraphOn. The alliance network is twisted, tangled and more than a little incestuous - maybe Mike Cowpland should get out more and meet people. Corel has a history of rather unsuccessful efforts to break into new territory, but it is a trier. There was a very early and brave attempt at a Java office suite which turned out to be too slow. Likewise CorelVideo (acquired by simply.com) was not a great success, nor its PDA and NC efforts. However, the Word Perfect acquisition now looks good, and Novell must be kicking itself for having disposed of its Corel shares before their dramatic rise. Corel still owes Novell $8 million from that deal, as at the end of its FY in November, but reduced the amount owing by $8 million during the year. The Corel NetWinder project taken over by Rebel.com uses ARM processors for its Linux machines, whereas Newlix (a deal with Corel was on announced on 12 January) is using Intel processors. LinuxForce, a professional services group in which Corel has an undisclosed stake, specialises in Debian: the deal was announced on 22 December. The S3 Professional Graphics Division partnership for 2D/3D graphics for the Linux desktop was announced on 16 December, the same day as the partnership with Creative, and a day after a deal with Bitstream for font support for Linux. What are we to make of this? Is it as straightforward as the company avows: building its Linux business? Most of the alliance partners are small start-ups, some with historical links through former Corel people or former Corel development products that did not make it. There are so many start-ups in the Linux world, including some bigger and healthier ones, that perceptions and clout will prove to be important in the survival stakes. In this respect, Corel as an alliance partner may not be a bad thing. Cowpland said in the quarterly results analysts call that Corel will not be directly helping alliance partners with sales calls, but might provide some marketing assistance and use of the Corel help-desk set-up. The future of Corel's Linux alliance programme will ultimately depend on Corel's performance. With only four profitable quarters in four of the last eleven quarters, the situation is still a little shaky, although the quarter just reported will calm some nervousness. It appears likely that Cowpland has found it easier to develop the Linux business by doing deals with small start-ups that have Linux fever, and want a stake in what they achieve. It is certainly getting hard to recruit competent Linux developers without incentives that would need to be too big for a medium-sized company to integrate in its compensation packages. If even one of Corel's Linux investments is a success, the company could easily find itself dwarfed by its child. Since even MSNBC has been enthusing about Corel's Linux distribution recently, it looks as though Corel is doing something right. Tax rebate produces surprise profit Corel made a surprise profit in its Q4 (ended 30 November), having issued a profits warning on 22 December. It turns out that the company obtained a delayed tax rebate from Revenue Canada of $14.5 million for some losses and R&D investment tax credits for the 1993 to 1995 tax years shortly after its profits warning. One might well wonder why it took so long, and whether there was some political component to the timing of the rebate, since it seems rather unlikely that Corel had wind of the timing. Apart from the windfall, the results were in line with what had been suggested earlier. The quarter's results now show revenue of $61 million ($243 million for the year) and net income of $4.6 million ($16.7 million for the year). Q4 sales were down 15 per cent compared with the previous quarter (down 1.5 per cent for FY99 compared with FY98), apparently because of Y2K effects which were said to have hit North American retail sales of WP. Linux sales in the quarter yielded $3.2 million from just three weeks in the stores, with a street price of $79. Cowpland said that Linux costs had been less than $2 million, so that the operation was already in profit. Graphics product sales held up, because they were primarily into the SOHO market which it was believed was less affected by Y2K purchasing decisions. Expenses were still regarded by the company as too high, despite expenditure having been reduced some $50 million over the last three years, primarily as a result of closing US operations. Expenses were higher for the cost of goods, advertising, selling and general/administrative costs. Gross margins are expected to rise to nearer 80 per cent from around 70 per cent in the next year, and the cash should be collected in 60 days rather than the reported 76 days for the quarter. Cowpland said there were no plans to lay people off to reduce overheads. Corel ended its FY99 with $18 million cash, down from $24 million at the beginning of the financial year. CFO Michael O'Reilly has agreed to stay as a financial consultant until the end of June, but would not disclose the terms, other than to say that the arrangement was "mutually beneficial" and that he would be working on some projects and the transition. It sounds rather as though he may have sold some Corel shares at an optimal moment, and may be interested in a different lifestyle. CEO Michael Cowpland said that the financial position was now restored, with a $47 million improvement in the bottom line. He noted that Corel was now "financially among the top Linux players" and stuck with his forecast that half Corel's revenue would be from Linux products in five years' time. Cowpland would not make a forecast for future Linux sales as he said there was insufficient data so far. Indeed, he would not be drawn on any forward projections, which suggests some caution as he approaches the hearing before the Ontario Securities Commission next month. Corel has achieved delivery targets, Cowpland said, and praised the engineering side for this. Linux downloads were now number one, he noted, and Red Hat had been displaced at number two by WP8 for Linux. Corel's download rate was two to three times that of Red Hat, Cowpland said, and it will be interesting to see how long this holds up. Certainly Red Hat has upset some users with its support policy over KDE, which is probably good for SuSE in Europe. It was noted that since the end of the quarter, Linux sales had continued at a similar rate. Corel's Q2 would see the WP office suite for Linux, Cowpland said, with new graphics products in Q3. FY99 was certainly an extraordinary year for Corel, as was reflected in its share price, which oscillated between C$3.05 and C$64.65 when Linux was white hot - a remarkable twenty-one fold spread. Yesterday it closed up 50 cents, at $20.562, having touched $24 during the day. ®

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